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Turnbull's double-D dilemma

The May budget could be brought forward to facilitate complex election timing. Fairfax's Mark Kenny explains.

But in stark contrast to the rhetoric, Turnbull's true attitude to ideas generation in government has proved distinctly 20th century.

In his pledge to be open-minded about tax reform, and to facilitate an open and honest debate about reform options, I am reminded of the "Hundred Flowers Campaign" mounted by the Chinese Communist Party in 1956.

China's leader, Mao Zedong, exhorted his citizens to "let a hundred flowers bloom and a hundred schools of thought contend". Touted as an intellectual flourishing, it quickly turned into a trap to snare dissidents, who were dealt with swiftly and mercilessly. Historians argue about whether it was a deliberate trap, or the campaign just got out of hand.

The same could be said of Turnbull's tax turnaround.

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Having promised that everything was on the table, Turnbull has since closed the door on almost every type of major tax reform.

Taking it on good faith that Australia was about to embark on an open and mature debate about tax reform, and, indeed, believing the government was planning to increase the GST, Labor drew up a comprehensive suite of tax measures, including increasing taxes on cigarettes, multinational firms, superannuation and investment housing.

A hundred flowers blooming.

The response from the government has been swift, and merciless.

Take this from immigration minister Peter Dutton, who this week slammed Labor's negative gearing changes on Radio 2SM: "I think the economy will come to a shuddering halt and I think the stock market will crash."

And one gets the feeling he's only getting started.

Brace yourself for the mother of all scare campaigns about how Labor is planning to tax your super, your house and your ciggies. And don't forget the mining and carbon taxes!

The supreme irony in all this is that the Abbott/Turnbull government has presided over one of the fastest increases in taxes as a percentage of GDP in our history. Revenue as a percentage of GDP has risen from 21.6 per cent in 2013-14 to a forecast 23.2 per cent by 2017-18.

Don't get me wrong, I don't think that's a bad thing. It is entirely to be expected given revenues were so depressed during the GFC.

But for a government touting itself as the party of low taxes, it's pretty interesting, isn't it?

Interesting too to note that government spending – at about 25 per cent – remains well above the level of the Howard government, which shrank revenue as a proportion of the economy to just 23.9 per cent in its last year. (Of course that was mostly due to a fast growing economy and low joblessness).

Again, I'm not saying that's a bad thing. But for a government intent on reducing the size of government, it is interesting to note.

The Coalition, of course, has made several attempts at reining in spending. Remember the GP co-payment, the six-month wait on Newstart, the less generous indexation of the age pension? All in the dustbin.

The Coalition's main saving: paper cuts worth $80 billion to states health and education budgets are so outlandish as to be unsustainable. The savings are booked into the bottom line, of course, but at least some of them will have to be undone.

On the latest estimates released late last year, the budget remains in deficit to the tune of $37 billion this financial year, on course to return to balance around 2020 to slim surpluses of less than a quarter of a percent of GDP.

Wayne Swan's last budget forecast a deficit of $18 billion, a return to balance in 2015-16 and surpluses from then of about one percent of GDP.

Of course, that turned out to be a fantasy.

I don't entirely blame Swan, or now Morrison, for the budget's poor performance. The budget is largely shaped by the economic cycle, and things have taken a decisive turn for the worst of late in terms of the income foreigners are prepared to pay us.

But politicians like to claim credit for these things, so it's only logical they must wear some blame when things go wrong.

The Coalition was elected on a three-pronged promise to cut taxes, preserve spending and fix the budget. Those promises were always mutually inconsistent.

Instead, it has increased taxes on petrol and high-income earners, backflipped by introducing entirely unrealistic spending cuts on states, and the budget remains bathed in red.

Can't cut taxes. Can't cut spending. Can't fix the budget.

Voters tell pollsters that economic management is the most important decider of their vote.

In reality, politicians have long since ceased exerting control over the economy. There was a day when public servants, under the direction of politicians, set interest rates and the value of the dollar on a daily basis. These days, the dollar floats on international market currents and borrowing rates are set by an independent central bank.

Good economic management these days boils down to policy tweaks that enhance the efficiency of the economy. Such changes invariably involve tradeoffs and create winners and losers. Good economic management does not win elections, unless the public is convinced of the need for such reform.

Labor deserves some credit for proposing a series of tweaks that would help restore the budget.

The government, so far, has produced nothing.

A hundred flowers withering on the vine.

That does not mean Turnbull & Co won't win the next election. Indeed, in a choice between higher taxes and the status quo or light tax relief, it's fairly clear where most swinging voters will land.

It just means that, on their own stated goals, the Coalition won't be particularly deserving winners.